Mobile Video Gamer May Move Up Fast

Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says a newly public company that puts video games on wireless networks has a bright future.

Recent IPO Glu Mobile (NASDAQ: GLUU) is riding the growth wave of mobile video gaming. Thanks mostly to key content partnerships and distribution deals, Glu's portfolio of more than 100 games is being marketed to over one billion subscribers at 150 carriers and distributors.

Given its global scale, carrier distribution and solid content portfolio, I believe that Glu is poised to gain share in a consolidating market environment.

The company was formed around a unique porting platform that efficiently, quickly, and inexpensively takes videogames, perhaps written for consoles or personal computers, and rewrites them to work on wireless networks.

Today, Glu Mobile provides more than 140 wireless games including Deer Hunter, Diner Dash, Monopoly and World Series of Poker for the mobile phone market. The company distributes its games by working with 150 wireless carriers.

As game developers and content providers such as Cartoon Network and FOX Sports Interactive scramble to figure out how to make their games work on cell phones, and as wireless carriers look for ways to keep people on their networks longer, Glu's technology lets companies port over their games faster and more inexpensively than if they tried to do it themselves. For 2006, the company generated some 88% of its revenues from licensed content, with the remainder from internally developed intellectual property.

Since the initial public offering in March (at $11.50 a share), the stock has been volatile, rising as high as $14.50 and falling to a low of $9.75. At its current price of [around $13, the company has a market capitalization of $375 million].

A month after the IPO, Glu reported first-quarter consolidated revenue of $15.7 million, an increase of 94% from the first quarter of 2006, and a net loss of $764,000 [compared with] the net loss of $3.5 million in the first quarter of 2006.

If Glu is able to achieve the low end of its operating margin target of 20%, then for the calendar year 2008, it could generate earnings per share of 70 cents. At a multiple of 30x [2008 earnings], that would give us a price target of $21 per share—an increase of 68%—my 12-month target.

I am confident that mobile gaming will continue to grow rapidly for the next few years and that Glu Mobile is well positioned as a top-tier player. An added bonus could come from the merger mania that is sweeping the markets. Eventually I think Glu Mobile could be bought out by a big video gaming company. I am recommending investors buy shares at current levels.